The Center's work on 'Process' Issues

Yes, We Can Avoid Both a Recession and a Long-Term Debt Explosion

June 7, 2012 at 3:09 pm

As my latest post for US News & World Report explains:

[T]he headlines generated by two recent Congressional Budget Office (CBO) reports could lead policymakers to think they are in a damned-if-you-do-damned-if-you-don’t dilemma over their budget choices — reducing the deficit risks a recession; not reducing it leads to a dangerous and unprecedented debt explosion.  But a closer read of the CBO reports says that if lawmakers have the will, they can find the way to avoid both.

One CBO report says that if we let all the scheduled tax and spending changes take effect in January, the resulting large reduction in the deficit would likely throw the economy into a recession in 2013.  Our recent analysis cautioned that while the economy would “start down a slope that could ultimately lead to a recession in 2013 . . .  that’s a far cry from the economy falling off a cliff and plunging immediately into recession.”  Lawmakers would have a little time to put better policies in place.

The other CBO report estimates that, without a politically sustainable deal to reduce long-term deficits, federal debt held by the public could rise to twice the size of the economy by 2037.  (That’s the yellow “Extended Alternative Fiscal Scenario” in the CBO graph below.)  So it would be a serious mistake to simply prevent January’s tax and spending changes from taking effect.

Source:  Congressional Budget Office

So, what’s the solution?  The first CBO report points out that lawmakers can “minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist.”   Our paper sketches the beginnings of how they might do that:

[A] cost-effective way to continue using the tax cuts to shore up the weak economy would be to extend the middle-class tax cuts for a year or two, allow the upper-income tax cuts to expire, and extend the tax-credit expansions targeted on low- and moderate-income households.  Such an approach would provide the most “bang-for-the-buck” in terms of supporting the economic recovery in 2013-14 without seriously compromising long-term fiscal sustainability.

How Much Would Raising the Bush Tax Cut Threshold Cost?

June 5, 2012 at 10:00 am

As we reported last week, the Joint Committee on Taxation (JCT) calculates that letting President Bush’s income tax cuts expire for families making over $1 million would save only 56 percent as much revenue as President Obama’s proposal to let the tax cuts expire for families making over $250,000.

It has also been noted, though, that 81 percent of the benefits of the Bush tax cuts for families making over $250,000 goes to millionaires.  If 81 percent of these high-income tax cuts goes to millionaires, why does setting the threshold at $1 million raise only 56 percent as much as setting it at $250,000?

The difference between the 81 percent and 56 percent figures represents the tax cuts that millionaires now receive on their income between $250,000 and $1 million.  Under the Obama proposal, they wouldn’t get to keep these tax cuts because the tax cuts would no longer be applied to income above $250,000.  But they would get to keep those tax cuts if the Obama proposal is changed so that the threshold is $1 million.

That’s why raising the threshold to $1 million would be so costly — losing $366 billion over 2013-2022, JCT estimates.

Consider a married couple earning exactly $1 million in salary (and taking the standard deduction).  If policymakers extend the Bush marginal tax rates for families up to $1 million, that couple would get roughly $31,000 more in tax cuts than if policymakers extend the Bush rates “only” for families up to $250,000.  This is because they would face the Bush marginal income tax rates (33 and 35 percent) instead of President Obama’s proposed rates of 36 and 39.6 percent on part of their taxable income.

Taxpayers with incomes between $250,000 and $1 million would gain much less from raising the threshold to $1 million.  A couple earning $300,000 and taking the standard deduction, for example, would get about $1,200 more in tax cuts than under the $250,000 threshold because part of their income would be taxed at 33 percent instead of 36 percent.  (Their income isn’t high enough to benefit from the cut to the top tax rate.)  That $1,200 is only about 4 percent the size (in dollar terms) of the increase in the millionaire couple’s tax cut.

Citizens for Tax Justice estimates that fully 50 percent of the tax cuts in 2013 from moving the threshold from $250,000 to $1 million would go to taxpayers with incomes above $1 million.

Understanding the “Fiscal Cliff”

June 4, 2012 at 4:39 pm

We released a new analysis earlier today that sorts through some of the fears about what policymakers and pundits are calling the “fiscal cliff”:  the income and payroll tax cuts that will expire and the across-the-board spending cuts that will take effect — all around New Year’s Day.  Here’s the opening:

The sooner policymakers enact legislation to put the budget on a sustainable long-term path without threatening the vulnerable economic recovery, the better.  But, as they prepare for an almost certain post-election “lame duck” session of Congress, policymakers should not make budget decisions with long-term consequences based on an erroneous belief:  that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on January 2 because policymakers haven’t yet worked out a budget agreement.

Click here to read the full paper.

On Revenue Losses from Extending Bush Tax Cuts up to $1 Million: That’s JCT’s Projection, Not Ours

May 31, 2012 at 5:29 pm

We issued a paper yesterday in which we noted that extending President Bush’s income tax cuts for households making up to $1 million a year is projected to lose nearly half of the revenue that President Obama’s proposal to extend the tax cuts only for households making up to $250,000 would raise.

Some news reports, such as this one, have mistakenly suggested that the projection we cited of the lost revenue from this proposal compared to Obama’s — a loss of $366 billion over the coming decade, or 44 percent — is a Center on Budget projection. In fact, the estimate comes from the Joint Committee on Taxation (JCT), which is Congress’ official scorekeeper on tax legislation.  It is JCT’s estimate of the revenue loss of extending the Bush tax cuts on the first $1 million of a tax filer’s income — and ending the tax cuts on income above that — rather than of extending the tax cuts only on the first $250,000 of income as Obama has proposed.

366 Billion Reasons Not to Raise the Bush Tax Cut Threshold

May 30, 2012 at 3:39 pm

Raising the income limit for extending President Bush’s income tax cuts from $250,000 to $1 million, as House Minority Leader Nancy Pelosi has proposed, would cost several hundred billion dollars, our new report explains — and about half of the benefits would go to millionaires.  The proposal, as we write in our report:

Raising Threshold for Extending Bush Tax Cuts Would Cost $366 Billion Over First Decadewould lose nearly half of the revenue that President Obama’s proposal to extend the tax cuts only for households making up to $250,000 would raise, according to new estimates from Congress’ Joint Committee on Taxation (JCT).  The higher threshold would raise 44 percent — or $366 billion — less in revenue over the coming decade than the lower threshold.  Citizens for Tax Justice has released estimates showing a virtually identical percentage revenue loss.

This means that policymakers ultimately would need to find $366 billion more in deficit savings to offset the cost.  That would make key programs ranging from Medicare to Medicaid and other low-income programs to education, basic research, food safety, defense, and homeland security significantly more vulnerable to deep cuts. . . .

Nor, despite common misconceptions, would the $1 million threshold end the Bush tax cuts for people making over $1 million.  In fact, millionaires would benefit substantially from the Pelosi proposal; they would receive roughly half of the tax cuts from raising the threshold from $250,000 to $1 million, according to Citizens for Tax Justice, because they would continue to get the full benefit of the Bush tax cuts on all of their income between $250,000 and $1 million. 

Click here for the full report.